Oil Markets: Are You Bearish Or Bullish?

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Includes: BNO, DBO, DTO, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO
by: Osama Rizvi
Summary

Markets seem to have reached a point of equilibrium; tightly range-bound.

There are both bullish and bearish factors present.

The bearish factors easily dominate the bullish. Hence, more likelihood for oil prices to go down.

It has been a while since I have written on oil. Why? Well, we all know that apart from the usual and insignificant fluctuation in prices triggered by inventory reports, there was not much to talk about. The headlines were irritatingly repetitive in nature; oil was moving either way (few cents or a dollar or so) as “concerns regarding global economic growth faded” or vice versa.

Oil markets for the optimists seem to have reached an equilibrium, for the realist, it remains a sham. If the current factors remain the same, the markets might remain range-bound in the short term. However, there are some jitters and it seems, though we have both bullish and bearish to chose from, the bearish ones seem to outweigh the bullish ones.

A waning hope for reaching an entente on trade war remains one of the main drivers of bullishness. OPEC’s production cuts and falling exports from the Kingdom of Saudi Arabia (hereinafter KSA) had further injected optimism.

However, given the current state of affairs between the U.S. and China, we can be sure that an end to the trade war is not nigh. Concerns regarding supply deficit? The U.S.’s production surpassed 12 million recently and it is now the world’s largest oil-producing nation. Recent data from China indicates a temporary slowdown in its economic activity.

Let’s explore the latest developments between the U.S. and China. Recently, Huawei has sued the U.S. government. This is more than just a suing. Chinese businessmen are asking the U.S. to prove their recent accusations that have created serious problems for the largest telecommunication equipment maker, Huawei, including the arrest of its Chief Financial Officer (CFO) who also happens to be the daughter of the company’s founder, Ren Zhengfei.

Yes, there were some positive developments regarding the trade war in January and later on Trump extended the self-imposed deadline of March 1st without increasing the tariffs from 10 percent to 25 percent. This was enough to trick some people as they saw the trade war coming to an end. But issues between countries are not solved only by uttering a few positive words. Especially when those countries are two of the largest economies of the world. Strategic fortitude and diplomatic manipulation are required. Trump lacks both. China has patience, but this doesn’t mean that it will agree on any deal that Trump proposes.

Also, try to connect the dots. The recent action by Huawei does not look like as if both countries are going to reach a solution soon. In fact, China has revoked the license, first time ever, of a Canadian company in a recent row. In a retaliation for Meng’s (CFO) arrest by Canadian authorities on the behest of the U.S., China has stopped importing canola from Canada’s biggest canola exporter, Richard International.

The strife between the two economic behemoths is expected to worsen or at least that is what I can guess.

Will you still buy?

If even after the above discussion you still feel that oil can break $60 (WTI) ($70 for Brent) then buy oil by all means. However, the bearish reasons clearly outweigh the bullish ones. Hence, selling near the $60s will be a good move than to buy it from there. It is always about the room - ask yourself once prices go up (that is if they went up) near or up to $60 - I was told charts are showing an upward movement) will it be a good strategy to buy or to sell? What news, factors or elements you think will support a rally above that level? If you have, let’s discuss in the comments!

To conclude, a looming trade war which only augments concerns regarding global economic growth will continue to exert downward pressure on oil. Selling from near $60 is a very safe option and can end up giving $4-6 in every trade.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in WTI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.